Republicans Unveil Tax Reform Framework

 

 

Republican leaders unveiled their framework for tax reform yesterday. The GOP’s Big Six working group issued a nine-page proposal in the morning, followed by a speech by President Trump in Indiana. The proposals described broad principles but offered little detail, leaving legislative language to be drafted by the Senate Finance Committee and the House Ways and Means Committee.

The slim GOP majorities in those committees (especially in the Senate), Democratic criticism that the plan is geared toward helping the wealthy, and right-wing Republicans who seek a more deficit-neutral reform, all suggest that there may be sufficient changes before any legislation is enacted. Yesterday’s framework should not be viewed as the final product.

The frameworks includes the following changes for individuals:

  • The seven current tax rates (10, 15, 25, 28, 33, 35 and 39.6 percent) would be replaced with only three (12, 25 and 35 percent), but dollar levels to apply at each level were not specified. An “additional top rate” on high-income tax payers was also suggested, with no detail of the percentage rate or income level to which it might apply. The framework not did address the tax on capital gains, currently at a maximum rate of 20%.
  • The standard deduction would be increased to $24,000 for married taxpayers filing jointly (currently $12,600) and $12,000 for single filers (currently $6,300). Personal exemption would be repealed, but the child tax credit would be increased and expanded to included non-child dependents. Most itemized deductions, possibly including the deduction for state and local taxes, would be eliminated, but deductions for charity and mortgage interest may continue.
  • The Estate Tax and the Alternative Minimum Tax would both be eliminated under the framework’s proposals.

Business proposals include these:

  • The corporate income tax rate would fall from 35 percent to 20 percent.
  • Pass-through business income, currently includible in the income tax bracket of its owners, would be taxed at a maximum tax rate of 25 percent.
  • Businesses could immediately deduct the full cost of new investments.
  • Interest expense incurred by C corporations would be limited, and interest expenses for other types of businesses would be reviewed.
  • The research tax credit and the tax incentives for low income housing would be retained, but the domestic production activities deduction would be repealed.

The framework also addresses international taxation, including an exemption for dividends from certain foreign subsidiaries and a one-time, low tax rate to repatriate wealth that has already accumulated overseas back to America.

 

Key takeaways

  • Yesterday, the Administration and leaders of the Congressional tax-writing committees released a “unified framework” for tax reform legislation that would significantly lower tax rates (including a 20% corporate income tax rate).
  • The framework upends many fundamental and long-standing principles of the U.S. income tax system, for example by eliminating most itemized deductions, limiting the ability of C corporations to deduct interest and altering the taxation of non-U.S. earnings.
  • The framework would replace the current worldwide U.S. taxation system with a territorial system that taxes U.S. multinational corporations only on income related to the United States, and it would impose a one-time tax on all existing foreign earnings (at rates to be determined).
  • However, the framework also proposes a new global tax on foreign profits that would undercut the effect of adopting a territorial system of taxation.
  • The framework is short on details and leaves many specifics to be decided by Congress in drafting the legislation, which will add uncertainty to the deal-making environment.